Lesson 2 - Gift and Estate Taxes

Question 1

Are Gift, estate, and generation skipping tax transfer systems unified?

Answer 1

Yes

Question 2

Rules Surrounding Below market rate/interest free loans?

Answer 2

• Lender must impute the interest that they would have earned had they made a bona fide interest-bearing market loan.
• The interest, also known as phantom interest income, is included in income even through the lender did not actually receive the money.
• whatever amount the lender (donor) must impute as interest income for income tax purposes is also the amount of the gift from the donor to the donee.
• amount may be eligible for the annual gift tax exclusion.
• See table for rules.

Question 3

What is the value of a gift?

Answer 3

-the value of the gift is the present value of the use that the donee will have as a result of the gift. The present value is determined using statutory tables related to terms of use.

Question 4

What is a net gift?

Answer 4

• A net gift occurs when a gift is made on the condition that the donee pay any gift tax due.
• Donor will have taxable income (income tax not gift tax) to the extent any gift tax paid by the donee exceeds the donors adjusted basis in the gifted property.

Question 5

What is the requirement for a split gift?

Answer 5

-A gift tax return (709) is required for all split gifts, and both spouses must consent and are required to sign the gift tax return.

Question 6

Gifts of separate property vs gifts of community property

Answer 6

Important !

Question 7

What is the lifetime gift tax applicable credit?

Answer 7

• Credit shelters up to $4,679,800 of taxable transfers in excess of the exclusion amount from transfer taxes.
• credit is calculated based on the $12,060,000 applicable exclusion.

first $1,000,000 would have tax due of $345,800 per tax table

next $11,060,000 is taxed at 40% which equals $4,424,000 for a total tax of $4,769,800 ($345,800 + $4,424,000)

-for gifts in excess of the annual exclusion, there is a mandatory reduction in the applicable credit amount.

Question 8

What are gifts of present interest vs future interest?

Answer 8

-Present Interest = unrestricted right to immediate use of property, qualify for annual gift tax exclusion

gifts of cash, property, where title passes immediately are common examples of gifts of a present interest.

-Future interest - is an interest which is limited in some way by a future date or time.

Question 9

What is a crummey provision and why is it used?

Answer 9

• Explicit right of a trust beneficiary to withdraw some, or all, of any contribution for a limited period of time, generally 30 days, after the contribution. (power to lapse)
• may limit the withdrawal right to an amount equal to the annual exclusion or less, thus converting a future interest in trust of gift to a present interest.
• The purpose is to qualify the person for the annual gift tax exclusion.

Question 10

What is the 5/5 Lapse Rule?

Answer 10

• Only applies when a trust has more than one beneficiary.
• a taxable gift is deemed to have been made when a power to withdraw an amount in excess of greater of $5,000 or 5% of the trust assets has lapsed, or not been used by the beneficiary.

Question 11

What transfers result in no gift tax?

Answer 11

• Gifts made to political organizations are exempt from gift tax.
• Qualified Transfer made directly to a qualified educational institution for tuition or a payment made directly to a medical care provider for qualifying medical expenses of someone else.
• qualified transfers are not allocated against the annual exclusion and do not reduce the applicable lifetime credit.

Question 12

How are transfers between spouses treated?

Answer 12

• they receive the unlimited marital deduction.
• if one of spouses is not a U.S citizen, the U.S citizen spouse can transfer $164,000 annually to their non-citizen spouse with no transfer tax consequences.

Question 13

What are the rules surrounding filing of the gift tax return?

Answer 13

• Form 709 is used to file a gift tax return.
• Follows same rules as regular tax return - file by April 15th, can extend by extending the donors income tax return, but tax and penalties still apply.
• statue of limitations for the IRS to assess any additional gift tax is three years, unless the gift is not adequately disclosed on a filed gift tax return, then statue of limitations never expires.

Question 14

What are the steps to calculate the gift tax liability for a donor?

Answer 14

1. Sum the “total Gifts” for the year.
2. Subtract the total exclusions and deductions (annual exclusions, marital deduction, charitable deductions.
3. add the donors taxable gifts for the calendar year (the sum of #1 and #2) to the donors previous taxable gifts for all prior calendar years.
4. calculate the gift tax from the unified estate and gift tax rate schedule.
5. reduce the gift tax by the gift tax deemed paid and the lesser of the applicable gift tax credit ($4,769,800) or the calculated gift tax. Gift tax deemed paid is the amount of tax that would have been paid if the donor had made the gift today.

Question 15

What are some gifting strategies?

Answer 15

• Gifts of appreciating property, if client wants to reduce their estate tax laibiliey, they should gift property with greatest potential for appreciation.
• gifting to spouse to take advantage of their estate tax exemption or using gift splitting.
• UGMA and UTMAS are used since gifts to these types of accounts are considered gifts of a present interest. The only caution is that UGMA and UTMA’s accnot be used to provide what would otherewise be legal support.

Question 16

Advantages of lifetime gifts vs. bequest

Answer 16

• gift tax paid on a taxable gift is excluded from the donors gross estate if the gift was made more than three years prior to death
• gifts during life can use the annual gift tax exclusion
• payments of support and expenses that would be considered qualified transfers during life are excluded from the calculation of gift tax. The estate tax calculation includes transfers for future support and for reasons that would otherwise be a qualified transfer.

Question 17

Estate tax calculation

Answer 17

Question 18

What is included in a decedents gross estate?

Answer 18

• see chart for items included, below for other items.
• Dower and Curtesy interest
• gifts made within three years of death (see other card)
• property gifted within three years of death

value of property gifted by the decedent within three years which would otherwise have been included in the decdents gross estate (transfers with a life estate, transfers taking effect at death, revocable transfers) must be included.

• Transfer of life insurance policy within three years of death (see other card)
• transfers with a retained life estate.

interest retained for a period only ascertainable by death

retained interest held at death.

-any interest in the property transferred by the decdent if the transfer was conditioned on all of the following:

possession or enjoyment of the property can be obtained only by surviving the decedent, and decedent has a reversionary interest in the property that exceeds 5% of the value of the property at death.

• Annuities (see other card)
• Joint Interest (see other card)
• power of appointment (see other card)
• Proceeds of life insurance
• property for which marital deduction was previously allowed:

a marital deduction will be allowed for property included in the gross estate of the first spouse to die and transferred to the surviving spouse if a QTIP election is properly made at the death of the first spouse.

Question 19

How are gifts made within three years of death treated?

Answer 19

Decedents gross estate includes:

1. gift tax paid on gifts made within three years of the decedents date of death. Only gift tax paid NOT the actual value of the gifts made within three years.
2. value of any property gifted within three years of the decedents date of death, if the decedent retained an interest.
3. the death proceeds of any life insurance policy insuring the decedents life that was gifted within three years of death.

Question 20

How is life insurance transferred within three years of death treated?

Answer 20

• proceeds of a life insurance policy on the life of the decedent will be included in the decedents gross estate if, within three years of the decedents death, the decedent made a gratuitous completed transfer of the policy.
• if decedent continued to pay premiums on a policy gifted within three years of death the premium payments would be a gift eligible for the annual exclusion (if a present interest)

Question 21

How are annuities treated for inclusion in gross estate?

Answer 21

• Single life annuity is an annuity paid to an annuitant until their death. Since payments stop at death, these are not included in the gross estate of the annuitant.
• Survivorship annuities, provide payments to a second person upon the death of the first. The value of a comparable policy on the second to dies is included in the first annuitants gross estate upon death.
• if the second to die contributed to the policy, only a proportionate value of the annuity is included in the gross estate of the first to die.

Question 22

How is Joint property treated for inclusion in gross estate?

Answer 22

• see examples!!!!!!!
• Decedents gross estate includes the fair market value at a decedents date of death of any property jointly held by the decedent and another person with a right of survivorship.
• executor must submit facts sufficient to show that property was not acquired with contributions of only one decedent or acquired by the joint owners or owners by gift bequest, devise or inheritance.

Question 23

How is power of appointment treated for inclusion in gross estate?

Answer 23

• SEE EXAMPLES
• gross estate of a decedent includes any assets over which the decedent held a GENERAL power of appointment at the time of his death.
• If the right to exercise is held to an ascertainable standard (health, education, maintenance, or support) then the power is not a general power of appointment and the property is not included in the decedents gross estate.
• if right to exercise is limited to the greater of “5 & 5” power and the power lapses before the decedents death then the power of appointment is not included in the decedents gross estate.

Question 24

How are proceeds of life insurance treated for inclusion in gross estate?

Answer 24

• Death Benefit proceeds of a life insurance policy on the life of the decedent are included in gross estate if at the decedents death, either proceeds were receivable by the decedents estate or the decedent had incident of ownership in the policy (see below)
• generally include the full death benefit unless:

benefit paid in an annuity (lump sum included) or policy is owned community property. If community property, only include half of the proceeds in the decedents gross estate

-Incident of Ownership = power to change bene, surrender policy, assign the policy, revoke an assignment, pledge policy as loan, obtain a loan against the surrender value of the policy.

Question 25

How are assets included in a decedents gross estate valued?

Answer 25

• Property included in a decedents gross estate is either the fair market value at date of death, or the alternate valuation date.
• Hard to value assets (real estate, art, jewelry, antiques, collectibles, and closely held business interest usually require an appraisal.

Question 26

How are closely held businesses valued?

Answer 26

Receive various valuation discounts:

• Minority discount - allowed if asset represents a minority interest in a business, 15-50%
• Lack of marketability discount - allowed for assets that have lack of marketability.
• Blockage discount - discount for sale of large blocks of corporate stock listed on a public exchange, the idea is that the stock cannot be sold without a decrease in markets price.
• key person discount - allowed for business which a key person has died or becomes disabled.

Question 27

How are Financial Securities valued? EXAM TIP - NEED TO KNOW

Answer 27

• Average of the high and the low trading price for the decedents date of death or the alternate valuation date.
• if valuation date is a weekend, the valuation of the financial security is the average of the applicable values for the trading day before and after.

Question 28

How is accrued interest and accrued dividends Valued?

Answer 28

• if bond or interest bearing investment is included in estate, the interest accrued but not paid to the decedent is added to the value.
• If dividend paying stock, the value of any declared dividends at the date of death may also be included in gross estate.
• see chart for example

Question 29

How are securities not traded on the valuation date valued?

Answer 29

See Image

Question 30

What are the qualifications to use the alternate valuation date?

Answer 30

1. The total value of the gross estate must depreciate after the date of death, and
2. the total estate tax must be less than the estate tax calculated using the date-of death values.

Question 31

How does alternative valuation work if elected?

Answer 31

1. all assets valued must use the alternate valuation date.
2. except: assets distributed or sold before 6 months which are valued at the date of distribution for sale, and.
   * wasting assets (annuitized annuities, patents, royalties, installment notes, lease income, must be valued at the date of death.)
   * these are assets that will decline in value for reasons other than market movement.

Question 32

What are the Deductions FOR Adjusted Gross estate?

Answer 32

• Funeral expenses
• last medical expenses
• administrative expenses
• debts of the decedent
• losses during estate administration

Question 33

What are the deductions FROM Gross estate to arrive at taxable estate?

Answer 33

the charitable deduction - unlimited charitable deduction for assets transferred to a charitable organization at the decedents death

unlimited marital deduction - unlimited marital deduction is allowed for the value of assets included in the decedents gross estate which are transferred to the decedents surviving spouse.

state death tax deduction - a deduction for estate, inheritance, legacy, or succession taxes paid to any state or territory.

Question 34

How do you calculate the tentative tax?

Answer 34

1. add back all taxable gifts after 1976 into taxable estate. added back at their fair market value as of the date of the gift.

Taxable Estate + post 1976 taxable gifts = Tentative tax base.

2. The tentative tax base

is the amount used to determine used to determine the tentative tax the total transfer (estate and gift) tax on all transfers during an individuals life and the individuals death.

3. The tentative tax

total transfer taxes, estate and gift, on all property transferred by the decedent during his life and at his death. Determined by applying the tax rate from the unified tax rate schedule to the tentative tax base.

4. reduce the tenative tax by the total gift tax paid during an individuals life, or payable on gifts included in the tax base to give the decedent credit for the tax paid on the post-1976 taxable gifts added when determining the tentative tax base.

Question 35

What are the credits from tentative tax?

Answer 35

-the tentative tax less the gift tax paid during a decedents life is further reduced by certain available credits such as the applicable estate tax credit (unified credit), credit for tax on other transfers, and the foreign death tax credit.

Question 36

What are the rules surrounding filing the estate tax return?

Answer 36

• Federal estate tax return, form 706 must be filed if a decedents gross estate, plus adjusted taxable gifts, is greater than the applicable estate tax credit equivalency for the year of death.
• Form 706 and the payment of any estate tax owed is due nine months after the decedents date of death.
• executoer may request a 6 month extension

Question 37

What are the penalties for failure to file and failure to pay an estate tax return?

Answer 37

-Failure to File penalty - 5% per month up to a max of 25%

if fraudulent 15% per month up to 75%

-failure to pay penalty - .5% per month up to a maximum of 25%

failure to file penalty is reduced by failure to pay penalty.